The SEC has issued its final municipal advisor rules. At over 700 pages, it’s a bit long to summarize and hit all of the high points. One of the things we are most interested in is people being inadvertently trapped by the municipal advisor rules, so this blog will focus on that.
You are not a municipal advisor if you do not offer “advice.” Rule 15Ba1-1(d)(1)(ii) provides that advice excludes, among other things, the provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities, including with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues.
For example, the SEC believes that advice does not include provision of the following general information:
- Information of a factual nature without subjective assumptions, opinions, or views;
- Information that is not particularized to a specific municipal entity or type of municipal entity;
- Information that is widely disseminated for use by the public, clients, or market participants other than municipal entities or obligated persons; or
- General information in the nature of educational materials.
The SEC believes that educational materials constitute general information if the content is limited to instructional or explanatory information, such as materials that describe the general nature of financial products or strategies, do not include past or projected performance figures (including annualized rate of return), do not include a recommendation to purchase or sell any product or utilize any particular strategy, and to the extent additional disclosure is available about a product (such as a prospectus), the materials contain information about how to obtain such additional information.
Conversely, the definition of advice under Rule 15Ba1-1(d)(1)(ii), as adopted, does not exclude information that involves a recommendation regarding municipal financial products or the issuance of municipal securities. Further and more precisely, the Commission believes that, for purposes of the municipal advisor definition, advice includes, without limitation, a recommendation that is particularized to the specific needs, objectives, or circumstances of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, based on all the facts and circumstances.
Whether a recommendation has been made is an objective rather than a subjective inquiry. An important factor in this inquiry is whether, considering its content, context and manner of presentation, the information communicated to the municipal entity or obligated person reasonably would be viewed as a suggestion that the municipal entity or obligated person take action or refrain from taking action regarding municipal financial products or the issuance of municipal securities.
According to the SEC, while the determination of whether a person provides advice depends on all the relevant facts and circumstances, the more individually tailored the information to a specific municipal entity or obligated person or a targeted group of municipal entities or obligated persons that share common characteristics, such as school districts or hospitals, with respect to municipal financial products or the issuance of municipal securities, the more likely it will be a recommendation that constitutes advice under the municipal advisor definition, which would require registration as a municipal advisor, absent the application of an exemption or exclusion from registration. For example, whether information describing municipal financial product alternatives constitutes advice under the municipal advisor definition generally depends on how individually tailored the information is to a particular municipal entity, obligated person, or targeted group of municipal entities or obligated persons that share common characteristics, as well as the content, context, and manner of presentation of the information communicated.
In the proposed rules there was considerable controversy surrounding what board members were excluded from the definition of municipal advisors. This appears to have been resolved. The final rule provides that all members of a municipal entity’s governing body, its advisory boards and its committees, as well as persons serving in a similar official capacity with respect to a municipal entity, to the extent they are acting within the scope of their official capacity, are not municipal advisors. Specifically, Rule 15Ba1-1(d)(3)(ii) exempts from the definition of municipal advisor “[a]ny person serving as a member of a governing body, an advisory board, or a committee of, or acting in a similar official capacity with respect to, or as an official of, a municipal entity or obligated person to the extent that such person is acting within the scope of such person’s official capacity.”
The SEC stated in the adopting release that the exemption in Rule 15Ba1-1(d)(3)(ii) would extend to all designees or public officials or members of a municipal entity’s governing body, to the extent such designation is made pursuant to existing rules of the municipal entity for designating or delegating authority.
Rule 15Ba1- 1(d)(3)(vi) exempts from the municipal advisor definition any person engaging in municipal advisory activities in a circumstance in which a municipal entity or obligated person is otherwise represented by an independent registered municipal advisor with respect to the same aspects of a municipal financial product or an issuance of municipal securities, provided that certain requirements are met. It would be nice if practice developed so that municipalities engaged their own independent advisors so that transactional partners do not inadvertently get trapped by the rules.
According to the release, energy services and solar energy companies had concerns as to whether they were municipal advisors. In the final release the SEC stated it considered the issues raised by commenters on the proposal and adopted its interpretation of the statutory engineering exclusion, substantially as proposed, to provide that engineers are excluded from the definition of municipal advisor “to the extent that the engineer is providing engineering advice,” with modifications and clarifications regarding the scope of its interpretation of the statutory exclusion in response to public comment. In general, the SEC stated it believes activities within the scope of the engineering exclusion may include feasibility studies, cash flow analyses, and similar activities; provided that the engineering exclusion does not cover activities in which an engineer provides advice to a municipal entity or obligated person regarding municipal financial products or the issuance of municipal securities.
The SEC believes that the exclusion covers an engineer’s provision of certain information to its client regarding a project schedule and anticipated funding requirements of the project. The SEC further believes that the provision of engineering feasibility studies that include certain types of projections, such as projections of output capacity, utility project rates, project market demand, or project revenues that are based on considerations involving engineering aspects of a project are within the scope of the engineering exception.
For example, the adopting release states an engineer who provides funding schedules and cash flow models that anticipate the need for funding at certain junctures in a project or engineering feasibility studies based on analysis of engineering aspects of the project will fall within the SEC’s interpretation of the statutory engineering exclusion from the municipal advisor definition. Absent other facts and circumstances which indicate that an engineer is providing advice to a municipal entity or obligated person regarding the issuance of municipal securities, an engineer’s use of assumptions provided by a municipal entity or obligated person regarding interest rates or debt levels in preparing an engineering feasibility study or cash flow analysis alone will not result in municipal advisory activity.
With respect to services related to cash flow analysis, a municipal entity might seek input from an engineering company about whether a project could be accomplished with estimated available funding, including the timing of such funding. Engineers that provide input about the anticipated funding requirements of a project would not be engaging in a municipal advisory activity. Thus, an engineer could advise a municipal entity about whether a project could be safely or reliably completed with the available funds and provide engineering advice about other alternative projects, cost estimates, or funding schedules without engaging in municipal advisory activity.
Engineering companies may also provide advice to their clients regarding financing of products and services delivered to such clients. As noted above, the SEC clarified that provision of general information that does not involve a recommendation regarding municipal financial products or the issuance of municipal securities (including general information with respect to financing options) would not be municipal advisory activity. Note however that the SEC stated that depending on all the facts and circumstances, the provision of information describing financing alternatives that may meet the needs of a municipal entity or obligated person may be considered a recommendation with respect to municipal financial products or the issuance of municipal securities that would be municipal advisory activity.
Introductions by engineering companies to financing sources was also addressed in the adopting release. The SEC stated it does not believe it is necessary or appropriate to provide a separate exemption for engineers engaging in introductions. The release notes that introductions provided by engineers would be subject to the same analysis as any other “solicitation of a municipal entity or obligated person.” According to the SEC, if an introduction does not result in direct or indirect compensation to the engineer, the introduction will not constitute a solicitation and the engineer will not be required to register as a municipal advisor.
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